The UK’s economic outlook has shifted as the OBR warns that inflation could settle at 3% due to ongoing Middle East tensions. The conflict, centered on military action against Iran, has introduced a new wave of volatility into energy markets. Experts believe this will lead to a significant increase in the cost of living for UK households, reversing recent downward trends.
David Miles of the OBR recently addressed the Treasury committee, explaining that the current price levels for oil and gas could add 1% to the consumer price index. Gas prices, in particular, have soared by more than 50%, while oil remains significantly more expensive than it was before the US-Israeli strikes began. This “material” change has forced a re-evaluation of the nation’s financial trajectory.
In response to the crisis, Chancellor Rachel Reeves has called for a focus on regional de-escalation. She has rebuffed requests to lower fuel duties, arguing that the markets are too volatile for such adjustments to have a lasting impact. Meanwhile, petrol prices have reached their highest rate of growth in two years, prompting the government to warn retailers against “price gouging.”
The news has caused a ripple effect in the City, where expectations for interest rate cuts have been slashed. Analysts now believe the Bank of England will maintain its current rates to combat the potential for a renewed inflationary spike. This decision would mean that interest rates remain a significant burden for both the public and private sectors in the coming months.
The Treasury’s ability to provide a buffer against these rising costs is restricted by current borrowing limits. The OBR pointed out that the government has less than half the “headroom” that would be required to fund a support package similar to the one used during the 2022 energy crisis. Consequently, the UK is more exposed to these global price swings than in previous years.